Shell could boost M&A to become world’s top power company

Royal Dutch Shell Plc could ramp up acquisitions of electricity producers to achieve its target of becoming the world’s biggest power company by the 2030s, according to analysis by Sanford C Bernstein Ltd.

To become the biggest low-carbon electricity provider, the company must produce 214 terawatt-hours of clean power every year by 2035, the analysis shows. That’s 11 percent more than Egypt, a country of nearly 100 million people, generated last year, according to data from BP Plc.

Shell could achieve that through organic growth, ultimately managing 61 gigawatts of power capacity, said Bernstein. However, it will probably want to move even faster and expand acquisitions of electricity producers, a strategy that has already divided investors.

“Shell want electricity to be the fourth pillar of their business, alongside oil, gas and chemicals,” analysts including Oswald Clint said in the report. “In much the same way they dominate the value chain in oil and gas, they want to do the same in electricity.”

The Anglo-Dutch major made an aggressive move into the U.K. retail power market this month by offering one of the cheapest tariffs available and supplying its 700,000 customers with power entirely from renewable energy.

Cutting Carbon

A key challenge to the company’s plan to become the world’s biggest power company is the fact that Shell has pledged to cut its carbon footprint in half by 2050. This means most of the capacity it adds to its portfolio must come from wind and solar power.

Today, Shell manages 10 gigawatts of electricity in the U.S. and only a third of that comes from renewables. To reach the 61 gigawatt target, calculated by Bernstein, the company needs to add 3 gigawatts of clean capacity each year.

That’s affordable within Shell’s current “new energies” budget of $1 billion to $2 billion a year, Bernstein said. However, the company will probably want its clean-power capacity to grow faster than that, Clint said by phone.

In terms of generation, the company will still fall short of Europe’s biggest clean energy supplier, Electricite de France SA, which controls 93 gigawatts of nuclear and hydro power capacity. Clint said that’s not directly comparable, because Shell is trying to generate most of its electricity from renewable energy.

Yet other big power producers that generate electricity from renewables, such as Enel SpA and Iberdrola SA, are also adding around 3 gigawatts a year, he said.

“That means we should absolutely expect Shell to also grow inorganically to the potential No #1 spot,” said the note. “Investors remain divided on this diversifying capital allocation.”